KADWANI FORGE LTD THRO DIRECTOR UTPALBHAI B SAVALIYA AND ORS Vs. STATE OF GUJARAT
LAWS(GJH)-2014-7-230
HIGH COURT OF GUJARAT
Decided on July 22,2014

Kadwani Forge Ltd Thro Director Utpalbhai B Savaliya And Ors Appellant
VERSUS
STATE OF GUJARAT Respondents

JUDGEMENT

- (1.) AS common question of law and facts arise in this group of petitions, all these petitions are disposed of by this common judgment and order.
(2.) IN all these petitions, respective petitioners have prayed for an appropriate writ, direction, order to quash and set aside the impugned notification dated 29.06.2010 as amended vide notification dated 07.09.2010 issued by the respondent No.2 at Annexure 'A' and 'B'. It is also further prayed to hold and declare section 11(6) of the Gujarat Value Added Tax Act, 2003 (hereinafter referred to as "VAT Act") as being unconstitutional and invalid. It is also further prayed to direct the respondent Nos.1 and 2 to refund the amount of tax paid by the petitioners for illegal reduction of tax credit to the extent of 2% on the taxable turnover of purchases within the State for which tax credit is admissible in respect of the goods sold/resold in the course of interstate trade and the commerce or the goods used as input including raw material in the manufacture of goods which are sold in the course of interstate trade and commerce. For the sake of convenience the facts as stated in the Special Civil Application No.17439/2011 are considered and the said Special Civil Application No.17439/2011 is treated as a lead matter.
(3.) THAT the petitioners are engaged in the activity of manufacturing and trading of iron and steel goods specified in Entry 43 of ScheduleII of the VAT Act as well as goods of special importance declared under Section 14 of the Central Sales Tax Act, 1956 (hereinafter referred to as "CST Act"). 3.1. It is the case on behalf of the petitioners that they are registered dealers under the provisions of the VAT Act and are holding certificate of registration granted under VAT Act and are entitled to tax credit on their respective purchases on taxable goods which are sold/resold in the course of interstate trade and commerce. It is the case on behalf of the petitioners that in view of the policy of the Central Act and introduction VAT Act, the petitioners who are the registered dealers are entitled to tax credit under the VAT Act. 3.2. That the respondent No.2 by notification dated 31.03.2006 specified the goods mentioned in the Schedule appended thereto which shall not be entitled to any tax credit. It is the case on behalf of the petitioners that therefore the petitioners are entitled to tax credit on taxable turnover of purchases within the State and interstate trade and commerce. 3.3. It is the case on behalf of the petitioners that despite the fact that the State has been compensated for the loss of revenue generated in view of the introduction of the VAT Act, the Finance Minister in the speech given on the budget presented for the year 2010-11 proposed to reduce the tax credit to the extent of 2% on purchase of goods made from within the State and used in interstate sales only on the ground that the Central Government has not taken any decision regarding payment of compensation being the loss suffered by the State because of reduction in rate of central sales tax for the year 2010-11. 3.4. It is the case on behalf of the petitioners that anticipating reduction of tax credit contrary to the VAT Act, the representations were made by the Greater Rajkot Chamber of Commerce and Industries as well as by Rajkot Engineering Association. It is the case on behalf of the petitioners that without considering the said representations, the respondent No.2 by exercising powers under Section 11(6) of the VAT Act, has issued a notification dated 29.06.2010 for nonentitlement of tax credit to the extent of 2% on the taxable turnover of purchases in respect of the goods mentioned in the said notification. That the aforesaid notification dated 29.06.2010 has been further amended vide notification dated 07.09.2010 and certain other goods are exempted under the amended notification. It is the case on behalf of the petitioners that despite the representations made requesting the respondent No.2 to withdraw the reduction of tax credit, no further steps are taken and tax credit to the extent of 2% on the taxable turnover of purchases within the State for which tax credit is admissible, in case the goods are sold/resold in the course of interstate trade and commerce has been denied. Hence, the respective petitioners have preferred the present Special Civil Applications for the aforesaid reliefs. Shri Mihir Joshi, learned Senior Advocate, Shri Percy Kavina, learned Senior Advocate and Shri Uchit Sheth, learned adovocates have appeared on behalf of respective petitioners. Shri Mihir Joshi, learned Senior Advocate appearing on behalf of the petitioners has vehemently submitted that section 11(6) of the VAT Act gives the Government power to classify class of goods or dealers and not class of transactions and therefore, the impugned notification which creates class of transactions is ultra vires the VAT Act. It is submitted that in exercise of power conferred by section 11(6) of the VAT Act, the State Government can either specify the goods or it can specify class of dealers. It is submitted that however as per Entry No.2 of the impugned notifications, input tax credit is to be curtailed by 2% if the goods are sold in the course of interState trade and commerce or if they are used as input including raw material in the manufacture of goods sold in the course of interState trade and commerce. It is submitted that in other words the State Government has effectively specified the class of transactions for which the input tax credit is to be restricted. It is submitted that therefore such specification is beyond the scope of section 11(6) of the VAT Act and therefore, Entry No.2 of the impugned notifications is ultra vires the parent provision of the VAT Act. 4.1. It is further submitted by Shri Mihir Joshi, learned Counsel appearing for the petitioners that section 11(6) of the VAT Act is ultra vires and violative of Article 14 of the Constitution of India. It is submitted that section 11(6) of the VAT Act gives unbridled power to the executive and therefore, violates Article 14 of the Constitution of India. 4.2. It is submitted that it is a well settled law that if the legislature grants discretion to the executive then it is necessary that the legislature also must give guidelines to the executive for the exercise of such power. Relying upon the decision of the Hon'ble Supreme Court in the case of Krishna Mohan (P) Ltd. v. Municipal Corporation of Delhi, 2003 7 SCC 151wherein section 116(3) of the Delhi Municipal Corporation Act, 1957 was declared invalid as it delegated unguided and uncanalized legislative powers to the Commissioner to declare any plant and machinery as part of land or building for the purpose of determination of the rateable value thereof, it is submitted that section 11(6) of the VAT Act is also required to be declared invalid. 4.3. It is further submitted that section 11(6) of the VAT Act simply gives the State Government power to specify goods and class of dealers which shall not be entitled to input tax credit. It is submitted that the said section does not provide for any guidance so as to under what circumstances such power should be exercised by the Government even though input tax credit is an integral and inseparable part of the value added tax scheme for which the VAT Act has been enacted. It is submitted that therefore section 11(6) of the VAT Act suffers from the vice of excessive delegation and hence it is arbitrary and violative of Article 14 of the Constitution of India. 4.4. It is further submitted by Shri Mihir Joshi, learned Counsel appearing on behalf of the petitioners that even if the argument of the State Government that the guidance to the power conferred by section 11(6) of the VAT Act is to be derived from the overall scheme and other provisions of the VAT Act and therefore, it cannot be said that the discretionary power given by section 11(6) of the VAT Act is unbridled and excessive is accepted even then the impugned notifications are not in furtherance of the scheme of the VAT Act. It is submitted that the VAT Act envisages payment of tax on value addition at every stage of sales of goods. It is submitted that preamble of the VAT Act states that it is an Act to consolidate and amend the laws relating to the levy and collection of tax on "value added basis" in respect of sale or purchases of goods in the State of Gujarat. It is submitted that therefore while section 7 of the VAT Act authorizes levy of tax on turnover of sales of a dealer under the VAT Act, section 11 of the VAT Act grants input tax credit of the tax paid on purchases made from within the State subject to the restrictions contained therein. It is submitted that section 13 of the VAT Act stipulates that the net amount of value added tax payable for a period shall be determined after adjustment of tax credit in the manner as may be prescribed. It is submitted that Section 11(6) of the VAT Act thus empowers the Government to provide for an exception to the General Scheme of VAT Act and therefore, such powers can be exercised only in a just and reasonable manner and if the circumstances so warrant. It is submitted that however curtailment of input tax credit by the impugned notifications has been contemplated with the sole objective of augmentation of revenue and not for any other purpose. It is submitted that as such the Finance Minister in the budget speech delivered prior to the issuance of the notification admitted that since the Central Government is yet to compensate the State Government for the loss of revenue because of reduction in rate of central sales tax, the State Government has decided to curtail input tax credit by 2% in case of interState transactions. 4.5.It is submitted that therefore the impugned notifications, by curtailing input tax credit in interState transactions, vitiates the fundamental rationale behind introduction of the VAT Act which is to levy tax on value added basis, merely on the ground that the State Government has not received the promised compensation from the Central Government. It is submitted that it is a settled law that if delegated legislation is not judiciously exercised in furtherance of the scheme of the parent statute then it is liable to be struck down on the ground that it does not conform to plenary legislation or that it is manifestly arbitrary. In support of his above submissions, learned Counsel appearing on behalf of the respective petitioners have heavily relied upon the decision of the Hon'ble Supreme Court in the case of Dai Ichi Karkaria Ltd. v. Union of India and Ors., 2000 4 SCC 57(para 8). Learned Counsel appearing on behalf of the respective petitioners have also relied upon the decisions of the Hon'ble Supreme Court in the case of P.J. Irani v. State of Madras, 1962 2 SCR 169 as well as in the case of Punjab Tin Supply Co. v. Central Government, 1984 AIR(SC) 87. 4.6. It is further submitted that in the case of P.J. Irani , section 13 of the Madras Building (Lease and Rent Control) Act, 1949 empowered the State Government to exempt any building or class of buildings from all or any of the provisions of that Act. That the Government passed an order under that section exempting a particular cinema house from the provisions of that Act and in the said decision the Hon'ble Supreme Court confirmed the observation of the High Court to the effect that any order passed by the Government under Section 13 of that Act could be subject to judicial review by the Courts for finding out whether (a) it was discriminatory so as to offend Article 14 of the Constitution of India; (b) the order was made on grounds which were germane or relevant to the policy and purpose of the Act and (c) it was not otherwise malafide. 4.7. It is submitted that the issuance of impugned notifications under Section 11(6) of the VAT Act merely on the ground that the State Government is yet to receive compensation from the Central Government does not bear any nexus with the scheme of the VAT Act nor does it advance the policy and purpose of the VAT Act, which is to levy tax on value added basis. 4.8. It is submitted that assuming without admitting that section 11(6) of the Act is a valid piece of legislation, even then the impugned notifications are in defiance of the scheme of the VAT Act. Therefore, they are arbitrary, discriminatory and violative of Article 14 of the Constitution of India. 4.9. It is further submitted by the learned Counsel appearing on behalf of the respective petitioners that the Parliament and the State legislation are empowered by various provisions of the Constitution to levy tax on citizens of the country and augment revenue. It is submitted that for example the State legislature derives the power to levy tax from Entry 54 of List II of the Constitution of India. It is submitted that augmentation of revenue is thus a legislative and not an executive function and therefore the power conferred upon the State Government under Section 11(6) of the VAT Act cannot be used as a tool for augmentation of revenue as has been done by the impugned notifications. 4.10. It is further submitted by the learned Counsel appearing for the respective petitioners that as such input tax credit under section 11 of the VAT Act is a statutory right given by the legislature and not an executive exemption. It is submitted that section 11 of the VAT Act entitles registered dealers to avail input tax credit inter alia of tax paid on purchases from registered dealers. It is submitted that section 11(3) (a)(ii) enables a dealer to avail input tax credit even if the goods are sold in the course of interState trade and commerce. It is submitted that therefore input tax credit is a right conferred upon dealers by the statute itself. It is submitted that infact it is an intrinsic part of the value added tax scheme and tax credit cannot be compared to an executive exemption notification. It is submitted that in the case of Collector of Central Excise v. Dai Ichi Karkaria Ltd., 1999 7 SCC 448 in the context of the excise law it was observed that Modvat credit is an indefeasible right if it is validly availed. 4.11. It is submitted that thus the input tax credit once validly availed by the dealers under Section 11 of the VAT Act becomes a statutory right and cannot be wished away as being merely a concession which can be withdrawn at the whim of the executive. 4.12. It is submitted by the learned Counsel appearing on behalf of the respective petitioners that even if it is accepted that section 11(1) (b) stipulates that the tax credit shall be subject to provisions of subsection (2) to subsection (12) and subsection (6) empowers the State Government to reduce input tax credit, the input tax credit being a statutory right and an integral part of the value added tax scheme, such power given to the executive by section 11(6) of the VAT Act has to be used reasonably and in genuine circumstances. 4.13. It is submitted that the power cannot be misused to the extent of wiping off the right of tax credit altogether to the extent of 2% in the case of interState sale transactions and that too only because the State Government is purportedly yet to receive compensation from the Central Government. It is submitted that therefore this is a flagrant abuse of power which is contemplated in the statute only to provide for exceptions to the right of the input tax credit on case to case basis if the situation and public interest so demands. It is submitted that therefore the impugned notifications are manifestly arbitrary and therefore violative of Article 14 of the Constitution of India. 4.14. It is further submitted by learned Counsel appearing on behalf of the respective petitioners that the reduction of input tax credit by the impugned notification affects free flow of interState trade and commerce and therefore, it violates Article 301 of the Constitution of India. It is submitted that Article 301 of the Constitution of India mandates the trade, commerce and intercourse throughout the territory of India shall be free. It is submitted that Article 304(b) of the Constitution allows the State Legislatures to impose reasonable restrictions on the freedom of trade, commerce or intercourse with or within the State as may be required in public interest. It is submitted that levy of tax is a restriction on the flow of trade and commerce and therefore, as such levy cannot be tested with reference to Article 304(b) of the Constitution of India so as to ascertain whether it is a reasonable restriction or not. 4.15. It is submitted that the Hon'ble Supreme Court recently in the case of State of U.P. and Ors. v. Jaiprakash Associates Ltd. in Civil Appeal No. 3026 of 2004 decided on 18.10.2013 has held that rebate of tax is also within the purview of taxation and therefore, grant or nongrant can also by held to be discriminatory and violating Article 304 of the Constitution of India. It is submitted that thus reduction of input tax credit can also be examined with reference to Article 301 read with Article 304 of the Constitution. In support of their above submissions, reliance is placed to a decision of the Hon'ble Supreme Court in the case of Lohara Steel Industries Ltd. v. State of Andhra Pradesh, 1997 2 SCC 3737 wherein exemption notifications issued under the Andhra Pradesh General Sales Tax Act, 1957 were held to be discriminatory and violative of Article 304(a) of the Constitution of India. 4.16. It is further submitted by learned Counsel appearing on behalf of the respective petitioners that the reduction of input tax credit relating to the inter State trade and commerce by the impugned notifications merely because the State Government is yet to receive compensation for reduction of central sales tax from the Central Government is an unreasonable restriction on the flow of interState trade and commerce inasmuch as interState sale transactions are worseoff visavis intraState transactions because of the additional tax burden of 2% by way of reduction of input tax credit. It is submitted that therefore, the impugned notifications violates Article 301 read with Article 304(b) of the Constitution of India. 4.17. Without prejudice to the above submissions and in the alternative, it is further submitted that in any case the impugned notifications insofar as they require reduction of input tax credit even in respect of goods declared to be of special importance under Section 14 of the CST Act violate Article 286 of the Constitution of India. It is submitted that Article 286(3)(a) of the Constitution of India authorizes Parliament of India to declare goods as of special importance and to impose restrictions and conditions in regard to the power of the States for levy, rates and other incidence of tax on such goods. It is submitted that thus the Parliament has been given authority to impose restrictions on the powers of the State Government to impose tax on sales or purchases of declared goods taking place within the State. It is submitted that pursuant to the powers conferred by the Constitution of India, Parliament has in section 2(c) of the Central Act defined declared goods as those goods which are declared under Section 14 of the Central Act as goods of special importance in interState trade and commerce. It is submitted that restrictions of the State in imposing tax on sales or purchases of declared goods are stated in section 15 of the Central Act. It is submitted that on considering section 15 of the Central Act it imposes restrictions and conditions on the power of the State to impose tax on sales or purchases of declared goods taking place within the State. 4.18. It is further submitted that an analysis of section 15(b) of the Central Act reveals the following: (i) On sale or purchase of declared goods tax must have been levied under the State law. (ii) The goods so purchased must have been resold in the course of interState trade and commerce. (iii) On interState sale tax must have been paid under the Central Act. (iv) In such eventuality, the tax levied under the State law on the earlier transaction of sale or purchase of goods will be reimbursed to the dealer making the interState sale. (v) The reimbursement of tax paid under the State law will be done in the manner and subject to such conditions as may be provided in the State law. It is further submitted that thus a mandatory condition has been imposed under section 15(b) of the Central Act upon the States that they should refund to the dealers the tax paid on local sales and purchases of declared goods if those goods are resold in the course of interState trade and commerce. It is further submitted that input tax credit admissible under Section 11 of the VAT Act is nothing but refund of tax paid on purchases made from within the State of Gujarat. Insofar as interState sale of declared goods is concerned, the provisions of section 11 of the VAT Act are in compliance with Article 286(3) of the Constitution of India read with Section 15(b) of the Central Act. It is further submitted by the learned Counsel appearing on behalf of the respective petitioners that the impugned notifications issued by the State Government under Section 11(6) of the VAT Act curtail to the extent of 2% the amount of refund of tax paid on purchases of declared goods as stipulated by Section 15(b) of the Central Act and therefore insofar as declared goods are concerned, the impugned notifications are clearly violative of Article 286 of the Constitution of India. In support of their above submissions, learned Counsel appearing on behalf of the respective petitioners have heavily relied upon the decision of the Hon'ble Supreme Court in the case of Manickam and Co. v. State of Tamil Nadu, 1977 39 STC 12. It is submitted that in the said case the facts were that the dealer had purchased cotton yarn by paying tax to the vendors under the Tamilnadu General Sales Tax Act, 1959. Cotton yarn so purchased was resold in the course of inter State trade and commerce. On the interState sales tax was paid under the Central Act. The dealer claimed refund of the tax paid on purchases. The same was denied as at the relevant time section 15(b) of the Central Act provided for giving refund instead of reimbursement as it stands now and therefore the interpretation of the lower authorities including the Madras High Court was that the refund can be given only to the dealers who had paid the tax. The High Court held that the dealer had purchased by paying tax to the vendor and therefore it was held that it was not entitled to refund of tax paid on local purchases. The Hon'ble Supreme Court did not accept the view so held by Madras High Court. According to the Hon'ble Supreme Court refund can be given not only to the dealer who had actually deposited the tax to the State but it could not also be to a dealer making interState sale because the price charged from such dealer by the seller would normally take into account the sale tax paid by it. While taking this decision, the Hon'ble Supreme Court also relied upon the subsequent amendment whereby the term "refunded" was substituted by "reimbursement" as is the provision which is currently in force and it has observed as under on page 18: "The amended provisions makes it plain beyond any pale of controversy that the tax levied under the State Act in respect of declared goods has to be reimbursed to the person making sale of those goods in the course of interState trade and commerce in such manner and subject to such conditions as may be provided in the law in force in that State. According to the notes appended to the statement of objects and reasons of the Bill, which emerged as the amending Act, the amendment made in clause (b) makes it clear that local sales tax would be reimbursed to the person making the sale in the course of inter State trade and commerce." 4.19. Learned Counsel appearing on behalf of the respective petitioners have heavily relied upon the decision of the Hon'ble Supreme Court in the case of State of Mysore and Ors. v. Mallick Hashim and Co., 1973 31 STC 358. It is submitted that in the said case the Mysore Sales Tax Act read with Rules made thereunder provided for granting refund of tax paid under the Act on purchases of declared goods if the goods were resold in the course of interState trade and commerce subject to conditions of filing application in the prescribed form within the prescribed time limit. The dealers who had resold declared goods in the course of interState trade and commerce were denied refund of tax paid on purchases either because they had not filed applications or they had filed applications after the expiry of prescribed time limit. That the Hon'ble Supreme Court affirmed the decision of the Mysore High Court that a rule cannot deprive the dealer of the right to get refund, to which it is entitled under section 15 of the Central Act. Thus even when the procedure prescribed under the State Rules was not complied with, Hon'ble Supreme Court has by treating section 15(b) of the Central Act as having an overriding effect held that the dealers are entitled to refund of tax paid on purchases of declared goods if those goods are resold in the course of interState trade and commerce. Making above submissions and relying upon above decisions, it is submitted that impugned notifications which require reduction of input tax credit to the extent of 2% even when declared goods are sold in the course of interState trade and commerce are clearly contrary to section 15(b) of the Central Act and hence, violative of Article 286(3) of the Constitution of India. Making above submissions and relying upon above decisions it is requested to quash and set aside the impugned notifications as well as to declare section 11(6) of the VAT Act unconstitutional.;


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